LLC vs S Corp: Which Saves More Tax for a Small Business?

An S corp election can cut your self-employment tax, but only once your profit is high enough to pay yourself a reasonable salary and still have profit left over. The salary carries payroll taxes. The profit above it doesn't carry self-employment tax. That gap is where the saving comes from.

The election also adds costs and work: running payroll, filing a separate business return, a smaller qualified business income (QBI) deduction, and in New Jersey, a minimum tax. So the answer to "LLC vs S corp" depends on your numbers. This guide walks through the rules and a worked example so you can see where the line falls for you.

Key Takeaways

• An LLC is a legal entity formed under state law. An S corp is a federal tax election. An LLC can keep its default tax treatment or elect to be taxed as an S corp.
• By default, LLC owners pay 15.3% self-employment tax on 92.35% of net earnings. As an S corp, you pay payroll taxes on a reasonable salary, and the remaining profit isn't subject to self-employment tax.
• On $100,000 of profit with a $60,000 salary, the gross payroll tax difference is about $4,950. The real saving is usually smaller once you subtract added costs and a smaller QBI deduction.
• To be an S corp starting January 1, 2027, file Form 2553 by March 15, 2027, or any time in 2026.
• In New Jersey, a federal S corp is generally treated as a New Jersey S corp automatically, and it owes a minimum tax based on New Jersey gross receipts.

LLC vs S corp: what's the difference?

An LLC is a legal structure created under state law, and an S corp is a federal tax status that an eligible business elects with the IRS. They answer two different questions. The LLC decides how your business exists under state law. The S corp election decides how the IRS taxes it.

You form an LLC with your state. It separates the business from you as a legal matter. It doesn't, by itself, choose a tax treatment beyond the IRS defaults.

Those defaults depend on how many owners you have. According to the IRS page on limited liability companies, a domestic LLC with two or more members is treated as a partnership and files Form 1065. A single-member LLC is a "disregarded entity." The IRS explains on its single-member LLC page that the owner reports the business on Schedule C of Form 1040 and pays self-employment tax like a sole proprietor.

An LLC can change its tax treatment by electing S corp status. It stays an LLC under state law. Only the federal tax treatment changes.

How is an LLC taxed by default?

A default LLC passes its profit straight to the owners, and that profit is subject to self-employment tax. Income tax applies too, but self-employment tax is the piece an S corp election can change.

Here is how self-employment tax works, based on IRS Topic 554:

• The rate is 15.3%: 12.4% for Social Security plus 2.9% for Medicare.
• It applies to 92.35% of your net self-employment earnings, not 100%.
• You can deduct half of your self-employment tax when you figure your income tax.

The Social Security part has a cap. For 2026, the Social Security wage base is $184,500, according to the Social Security Administration. Earnings above that aren't subject to the 12.4% portion. The 2.9% Medicare part has no cap.

Higher earners also owe the 0.9% Additional Medicare Tax above $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married filing separately.

In a default LLC, self-employment tax applies to 92.35% of your profit (the Social Security part only up to the wage base), whether you take the money out of the business or not.

How does S corp taxation work?

An S corp splits your income into two parts: a salary paid through payroll, and the remaining profit, which passes through to you on Schedule K-1.

The salary is subject to FICA, which is the same 15.3% combined rate. Half is withheld from your paycheck (7.65%) and half is paid by the business (7.65%). The remaining profit still shows up on your personal return for income tax, but it isn't subject to self-employment tax.

That sounds like an easy way to pay yourself a tiny salary. The IRS closes that door. Its guidance on S corporation compensation says: "S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee."

The IRS lists factors that shape what "reasonable" means, including:

• Your training and experience
• Your duties and responsibilities
• The time and effort you devote to the business
• The company's dividend history
• What the business pays non-shareholder employees
• What comparable businesses pay for similar services

There's no fixed percentage. Your salary should match what you would have to pay someone else to do your job. If you can't support a salary meaningfully below your total profit, the election may not save much.

What does the saving look like on $100,000 of profit?

On $100,000 of profit, an S corp paying a $60,000 salary shows a gross payroll tax difference of about $4,950. The table compares a single-member LLC with default taxation against the same business as an S corp. Both use 2026 rates, and both stay under the Social Security wage base.

The gross difference is $14,129.55 minus $9,180, or $4,949.55.

That is not your saving. It's the starting point. Several things pull it down:

• A smaller QBI deduction. The salary you pay yourself isn't qualified business income. Moving $60,000 into wages shrinks the base for the 20% deduction, which can raise your income tax.
• Payroll costs. You need to run payroll, withhold, deposit taxes, and file payroll returns. Many owners use a payroll service or an accountant for this.
• Return preparation. The S corp files its own return, Form 1120-S, which costs more to prepare than a Schedule C.
• New Jersey minimum tax. A New Jersey S corp with $100,000 to $249,999 of New Jersey gross receipts owes a minimum tax of $562.50.
• Unemployment taxes. Your salary also carries unemployment taxes.

The real saving is usually smaller than the gross difference, and it depends on your facts. A different reasonable salary, other income on your return, or your state can change the result. Treat this example as an illustration, not a forecast.

A common math mistake: some online examples apply 15.3% to the full profit. Self-employment tax applies to 92.35% of net earnings, so those examples overstate what an S corp saves. Use the 92.35% step before you decide.

When an S corp election usually makes sense

An S corp election usually makes sense when your profit sits comfortably above a reasonable salary for your role, and you'll keep it there year after year. The bigger that gap, the more room the payroll tax saving has to outrun the added costs.

It tends to fit when:

• Your profit is well above what you'd pay someone to do your job. That's the gap that escapes self-employment tax.
• Your income is steady. A predictable profit makes it easier to set a salary and stick to it.
• You're willing to run payroll. That means regular paychecks, tax deposits and filings, plus clean books. Our monthly bookkeeping checklist covers the routine an S corp needs.
• You already keep good records. Books that are current make the 1120-S and payroll much less painful.

When doesn't an S corp make sense?

An S corp often doesn't pay off when profit is low, swings a lot from year to year, or when you can't justify a salary well below your profit.

Watch for these situations:

• Low profit. If a reasonable salary would eat most of your profit, there's little left to save on, and fixed costs can wipe out the difference.
• Irregular income. A big year followed by a thin one can leave you paying payroll costs on a business that barely broke even.
• A salary you can't defend. If your role and the market say your pay should be close to your total profit, the saving shrinks.
• Ineligible owners. Some owners and ownership setups can't be S corps at all. The next section covers the limits.

Also count the time. Payroll and a separate return add ongoing work. If you're weighing that against your current setup, our guide on what bookkeeping costs a small business can help you price it.

S corp eligibility rules

Not every business can elect S corp status. The Form 2553 instructions set these limits:

• No more than 100 shareholders.
• One class of stock.
• Allowed shareholders only: individuals, estates, certain trusts and certain tax-exempt organizations.
• No nonresident alien shareholders.

If any owner of your LLC doesn't fit these rules, the election isn't available. Check this before you file.

How and when do you elect S corp status?

You elect S corp status by filing Form 2553 with the IRS. An LLC that files Form 2553 doesn't need to file Form 8832 first. The Form 2553 instructions say an eligible entity filing Form 2553 "doesn't need to file Form 8832."

Timing matters. You must file no more than 2 months and 15 days after the start of the tax year the election is to take effect, or any time during the year before.

For a calendar-year business that wants S corp status from January 1, 2027:

• File any time during 2026, or
• File by Monday, March 15, 2027.

Missed it? Relief may be available under Rev. Proc. 2013-30. You generally need to file within 3 years and 75 days of the intended effective date and show reasonable cause for being late. Write "FILED PURSUANT TO REV. PROC. 2013-30" at the top of the form.

For other key dates next year, see our small business tax deadlines for 2027.

What new filing duties come with an S corp?

Once the election takes effect, your business takes on duties a default LLC doesn't have.

Payroll. You pay yourself a reasonable salary through payroll, withhold income tax and FICA, pay the employer share, and file payroll returns on schedule.

Form 1120-S. The S corp files its own return, due the 15th day of the 3rd month after the tax year ends. For a calendar-year S corp, that's March 15. The Form 1120-S instructions cover the details.

Schedule K-1s. The S corp issues a K-1 to each shareholder showing their share of income, deductions and credits. You use it to file your personal return.

Late filing penalties. Filing the 1120-S late is costly. For returns due after December 31, 2026, the penalty is $260 per shareholder per month, for up to 12 months, according to the Internal Revenue Manual. A two-owner S corp that files 3 months late faces $1,560.

If your business also pays contractors, those reporting rules don't change with the election. Our post on the 2026 Form 1099-NEC threshold explains what to file.

What should New Jersey business owners know?

In New Jersey, a federal S corp is generally treated as a New Jersey S corp automatically, and it owes a minimum tax each year.

Automatic New Jersey S status. For privilege periods beginning on or after December 22, 2022, a business with a valid federal S election is treated as a New Jersey S corporation. You can opt out by filing a C Corporation Tax Status Election, which needs consent from 100% of shareholders. Even with automatic status, the business must still register, show proof of its federal S status, and file the Shareholder Jurisdictional Consent. The New Jersey Division of Taxation FAQ explains the steps.

Minimum tax. New Jersey S corps owe a minimum tax based on New Jersey gross receipts, per the Division of Taxation:

BAIT. Partnerships, S corps and multi-member LLCs can elect New Jersey's Business Alternative Income Tax, which generally taxes income at the entity level and gives owners a credit. See the New Jersey BAIT FAQ for the rules.

How does the QBI deduction affect the decision?

The QBI deduction can shrink the S corp saving, because the salary you pay yourself doesn't count as qualified business income.

Under Internal Revenue Code section 199A, eligible owners of pass-through businesses can deduct up to 20% of qualified business income. Public Law 119-21 made this deduction permanent by removing its sunset. It also added a $400 minimum deduction for owners with at least $1,000 of qualified business income from businesses they actively take part in, and it widened the phase-in range for higher-income limits.

Here's the trade-off. In a default LLC, your whole profit can count toward QBI. As an S corp, the reasonable compensation paid to you isn't QBI. Only the remaining profit counts. A higher salary means more payroll tax and a smaller QBI deduction, so both sides of the math move together.

Higher-income owners also face limits based on wages paid and the type of business. Where you land depends on your taxable income for the year, so model it with your full return in view.

How Asquaire can help

Asquaire Financials helps small business owners set up and file the right way. We offer LLC formation services from $149 plus the state fee, and business and individual tax preparation from $650 per business return and $199 per individual return. Before you elect, we can run the numbers for your business, including a reasonable salary, payroll costs, the QBI effect and New Jersey minimum tax. Our founders are ACCA-qualified with Big Four experience. Asquaire is not a CPA firm.

Frequently asked questions

Is an S corp better than an LLC?

They aren't really alternatives. An LLC is a legal entity, and an S corp is a tax election that an LLC can make. The real question is whether your LLC should keep its default tax treatment or elect S corp status. That depends on your profit, a reasonable salary for your role, and the added costs.

At what profit does an S corp make sense?

There isn't one number that fits every business. It depends on what a reasonable salary for your role would be, how much profit is left above it, and your added costs for payroll, the 1120-S, the QBI effect and state tax. We can work through the figures for your business before you decide.

Can a single-member LLC be an S corp?

Yes. A single-member LLC can elect S corp status by filing Form 2553, as long as the owner is an eligible shareholder. The LLC stays an LLC under state law and is taxed as an S corp.

When is the S corp election deadline for 2027?

For a calendar-year business that wants S corp status from January 1, 2027, file Form 2553 any time during 2026 or by Monday, March 15, 2027. Late relief may be available under Rev. Proc. 2013-30.

Do I need to file anything with New Jersey?

Yes. New Jersey generally treats a federal S corp as a New Jersey S corp automatically, but the business must still register, show proof of federal S status, and file the Shareholder Jurisdictional Consent. It also owes the New Jersey minimum tax each year.

The bottom line

An S corp election can lower self-employment tax, but only when your profit clears a reasonable salary by enough to cover the added costs and the smaller QBI deduction. Model your own figures before you file Form 2553, and leave time to set up payroll before the year begins.

If you'd like help working through your numbers, talk to us about your LLC or S corp decision.

This article is general information, not tax advice for your situation.